Flextronics software

Barbarians go soft

The market for Indian IT and outsourcing firms gets even hotter

FROM his office in Gurgaon, a boom-town next to Delhi, the future looks rosy to Arun Kumar, boss of Flextronics Software Systems (FSS), and one of the architects of India's information-technology triumphs. Competition is emerging, but “the opportunity is so large”, that things seem set fair for the next five years at least. Kohlberg Kravis Roberts (KKR), most famous of American private-equity firms, seems to share his optimism. On April 16th it announced it was buying 85% of FSS from its owners, Flextronics, a contract manufacturer for the electronics industry, with its headquarters in Singapore.

The price—$600m in cash with a further $250m plus interest due in eight years' time—make this one of the largest deals yet in India's IT industry, and the biggest leveraged buy-out by a private-equity firm operating in India. In recent months there have been a number of takeovers of both IT firms and of those in the broader area of remote back-office services (“business process outsourcing”, or BPO). Last August Oracle, an American software giant, bought control of i-flex, India's largest exporter of software products—in its case, banking systems. In March RR Donnelly, a big American printing firm, agreed to buy OfficeTiger, a Chennai-based BPO firm, for a reported $250m.

These deals and KKR's purchase illustrate three trends. First is the expected growth of IT-outsourcing and BPO. Mr Kumar estimates that, just in FSS's niche—sophisticated software for the communications industry—there is a potential market of $100 billion a year, of which so far only $2 billion is being outsourced. His firm, which had 90 people in 1995, now has 6,100, 85% of them in India. Second, this optimism about business prospects is being translated into valuations that make suitors hard to resist.

Third is the recent availability in India of the huge resources of private-equity firms, looking for a home. This is KKR's first investment in India, although last year, in what it describes as the largest private-equity investment in history in a technology firm, it was part of a consortium that acquired SunGard, a big financial-software firm, which, like most such companies, has substantial operations in India.

For Flextronics, the sale represents a handsome return on an investment made only two years ago. FSS made the first of its names as Hughes Software. It was briefly acquired, in 2003, by Rupert Murdoch's News Corp. It found itself in the shopping basket that bought Mr Murdoch another Hughes company, DirecTV, an important part of his global television ambitions. Flextronics picked up the software arm in 2004 as News Corp divested itself of the bits of Hughes it did not want. Now Flextronics has said it wants to get back to its own knitting—“electronics-manufacturing services”—though it has also said it intends to hang on to its 15% stake in FSS.

For FSS, an orphan for a second time, one difficulty all this raises is nomenclature. Because of its stature in the industry, neither its potential recruits nor its customers were bothered by its last change of name, from Hughes to FSS. Mr Kumar says some of his employees' families, however, less steeped in the business, were worried about the damage it might do to their relation's marriage prospects. This time, he has announced a competition to suggest a name. The Economist's entry? “AsSweet.” (As in: “a software firm by any other name would smell...”)